Snap up cut-price Cineworld

We first suggested buying shares in Cineworld in February 2010 on the basis that the cinema chain was poised to benefit from the arrival of 3D films. It stole a march on rivals by investing heavily in the new digital technology; despite having just a fifth of the market, at the time it operated half of the UK's 3D screens.

Our advice was timely. Cineworld's share price shot up over the next six months, helped by strong trading as audiences, wowed by the spectacle of blockbusters such as Avatar, flocked to its cinemas to see more 3D films and paid higher prices for the privilege. Yet, at an average of £4.91, Cineworld still has the lowest ticket prices in the industry, and initiatives such as its 'Unlimited' viewing card are helping it attract audiences even in these straitened times.

However, Cineworld's dependence on the strength of the movie pipeline became clear in recent months as a soggy release schedule hit sentiment, and rivals caught up in the technology stakes. Investors' nerves were also rattled when its former owner, private equity house Blackstone, sold its remaining stake and, more recently, when its finance director unexpectedly left (and has yet to be replaced).

Our response was to suggest that those who followed our tip should take their profits. Even so, the company's bosses - and some City analysts - are adamant that the "personal reasons" cited for the finance director's departure are not a code for something worrying, and that the members of the finance team who have temporarily taken on the FD's responsibilities were more than capable.

Certainly, the company's first-half results suggest it is business as usual. Admissions in the half were up 2.2 per cent in spite of fewer blockbuster releases in the period. This meant that, even though fewer people went to see higher-priced 3D films, box-office receipts climbed 2 per cent - testament to the recession resilient nature of cinema. In fact, Cineworld still makes more money on 2D films because of lower film costs, which meant underlying profits - stripped of £2.6m of exceptional costs related to the conversion of its estate to digital - held steady, despite a 6 per cent fall in other revenue, chiefly advertising and food.

The second half has started strongly, too, thanks in particular to the release of the final instalment of the Harry Potter series, which is the biggest film of the year so far, taking £65m in the UK. Cineworld has also been helped along by strong performers, such as Captain America and Rise of the Planet of the Apes. The pipeline for the rest of the year looks promising, with Sherlock Holmes 2, Tintin, and a fourth instalment of the popular Twilight Saga to come. The ongoing conversion of its cinemas to digital screens should help it to capitalise on the new films and lower costs, saving around £1.1m a year. The group has 400 3D screens, and another 80 will be converted in the period, after which 70 per cent of the estate will be digital.

Developments in the cinema industry also have positive implications for Cineworld. Guy Hands' private equity group, Terra Firma, is looking to offload Odeon/UCI, and there are said to be several interested parties, despite a price tag of more than £1bn against cash profits of around £100m. Vue was acquired in 2010 at a valuation of 7.5 times cash profits, and its private equity owners have suggested that it may target Cineworld on the basis that a combined entity could generate annual cost savings of up to £25m.